1. Field of the Invention
The present invention relates to investment instruments, and more particularly to methods to control the concentration of debt instruments by individuals or groups acting in concert.
2. Description of the Related Art
Almost all American corporations have protected themselves against unwanted stock accumulations by adopting a shareholders rights plan, commonly called a Poison Pill. The Poison Pill can be adopted by the Board without shareholder approval and limits stock accumulations. Indeed, the Poison Pill was developed to avoid the requirement of shareholder approval to thwart the veto of large stockholders, including institutional investors. By its design, the Poison Pill limits liquidity of accumulators and large holders since blocks cannot be sold that exceed the pill's designated percentage limitations. Investors have all adjusted to the Poison Pill and most shareholders are now comfortable that it is a fixture in the corporate landscape, a necessary corporate device protective of public shareholders, although institutional investors from time to time seek redemption of certain corporate Poison Pills.
Equity shareholders, however, still remain unprotected against accumulation of company debt that trades publicly. When a corporation's fortunes sag or the economy is in a down cycle where corporate debt in many industry segments trades at substantial discounts, accumulators of debt have a powerful say in the future of the corporate enterprise and the value of the equity. Indeed debt accumulators can control the debt structure of a corporation, extract enormous premiums from the equity when covenants have to be amended and can block beneficial reorganizations. Accumulations occur at all levels of the debt structure, including bank debt and other senior public instruments, not only junk bonds. In good times, debt accumulations don't matter (and there is little economic incentive to accumulate) but in hard times accumulators of debt at a discount determine the fate of the enterprise and the value of the equity.
Corporate debt markets and debt accumulators are largely unregulated compared to the regulatory scope of the Williams Act for equity accumulators. For most purposes, debt markets are a wild west. There are no brakes on debt accumulations nor is public reporting required. Accordingly, companies have no advance notice of large accumulations. In some markets, investors can accumulate debt with impunity and become bolder as debt prices sag.
What is needed is a remedy for new issuances of debt securities and remedies for currently traded debt securities, depending on the capital structure of the corporation, that can be adopted by the Board, like a Poison Pill.